Competition and Manipulation in Derivative Contract Markets

95 Pages Posted: 2 Jul 2019 Last revised: 29 Jul 2020

See all articles by Anthony Lee Zhang

Anthony Lee Zhang

University of Chicago - Booth School of Business

Date Written: July 28, 2020

Abstract

This paper studies manipulation in cash-settled derivative contract markets. When traders hedge factor risk using cash-settled derivatives, which are settled based on the price of a spot good, traders can manipulate settlement prices by trading the spot good. In equilibrium, manipulation can make all agents worse off. I define two measures of manipulation-induced welfare losses, which can be estimated using commonly observed market data. Using these measures, I estimate how large manipulation-induced distortions would be if COMEX gold futures were cash-settled using the London Bullion Market Association gold price benchmark.

Keywords: derivatives, manipulation, regulation

JEL Classification: D43, D44, D47, G18, K22, L40, L50

Suggested Citation

Zhang, Anthony Lee, Competition and Manipulation in Derivative Contract Markets (July 28, 2020). Available at SSRN: https://ssrn.com/abstract=3413265 or http://dx.doi.org/10.2139/ssrn.3413265

Anthony Lee Zhang (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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